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In this paper, I will focus on the effect of Covid-19, particularly within the finance industry. It centers on the impacts of this pandemic on the private banking system. The crisis of Covid-19 has really negatively impacted communities, businesses, and organizations, inadvertently impacting the monetary markets and the worldwide economy. The lockdown and uncoordinated governmental responses have resulted in a disruption in the supply chain. The Coronavirus pandemic has generated high volatility and great instability in the global capital markets. Whereas the full impacts are not yet o be determined, it is expected that the adverse implications are possibly to persist from the virus’s knock-on effects.
The private banking system industry offers affluence management services provided to ultra-high-net-worth (assets over $10.0 million) and high-net-worth (assets over $1.0 million) persons (Boru, 12). In the private banking sector, the primary services include asset management and trust, investment advisory, and estate planning, whereas specialized services include alternative investment advisory and philanthropic advisory, including private equity, hedge funds, and real estate, among others (Boru,13). In the aftermath of the novel Covid-19 pandemic, both financial and regulators’ private banking institutions are navigating through unchartered waters. From the maintenance of liquidity and cash to re-adjusting operations, private banks have developed the necessity to safely navigate complex government provision measures to deal with the current crisis. The private bank industry has come up with measures introduced by regulators to make sure liquidity and access to capital, the present support by private banks and regulators to uphold monetary stability, in addition to challenges they continue to contend with.
In terms of the short-term effect, the year of lockdowns, closure, and supply chain disruptions have affected, to a large extent, the sector of private banking. The changes in the market prices ad volatility affect the private bank field. Around mid-February 2020, the world was a different place. Equity markets around the world were in a comfortable position- a number of them at an all-time high, with them with the hope that the worldwide financial system would keep on with its moderate growing pathway with healthy business earnings in a low-interest-rate environment. For most depositors, it was a risk-on situation. Something that occurred afterward is well known. The low-interest-rate scenario, together with the great impact of the Coronavirus pandemic, reduces the fundamental private banking profitability in mature markets (Boru,15). Financial establishments are therefore changing towards commission-based revenue from the likes of payment and tech businesses. Together with other monetary establishments, private banks around the world did not have enough experience or time to react to the rapidly changing business and work settings to ensure smooth navigation as possible surrounding the impact of Coronavirus pandemic for their own establishments and simultaneously for those of the clients.
When it comes to the mid-term challenges, the exercise of private banks aggressively reducing interest rates even more from preceding historic lows has placed more pressure on private bank’s interest limits. Additionally, whereas private banks emphasize funding business, they might later consider focusing on test banking resolutions created after the worldwide monetary predicament. One of the effects includes a potential drawdown on credit by clients. It is in a way that private banks play an important role in facilitating the availability of capitals is enough to support people and businesses devoid of risking their liquidity position. Private banks might require to recalibrate their current liquidity stress models to cater to adequate money if a great drawdown of loan services is needed. Revision to loan loss provision estimates is another medium-term challenge. As the financial viewpoint keeps on being extremely volatile, predictable credit losses previously calculated will require revisiting to justify the ambiguity and measure of the Coronavirus pandemic. Private banks are probably to witness an upsurge in their likely loan loss provision. Another medium-term challenge is the compressed net interest income margin. Despite the fact that the cost of funding will be lower, the yields on private bank’s assets might also decline mainly as a result of the augmented competition in flights to safety and mortgage loans to investment-grade assets. The effect further compresses private bank’s net interest margin and profitability. The last mid-term challenge is that the financial recession will possibly get an increase in non-performing loans. Private banks have to perform a review on their current loan portfolio to justify an upsurge in credit exposure and assign more funds to tackle the greater credit exposure.
In terms of the long-term changes, the Covid-19 pandemic will come on top of the pre-crisis challenges of the traditional private banking business model: low profitability and revenue pressure. There will also higher levels of capital and low levels of interest rates, tighter regulation, and cumulative competition from new digital entrants and shadow banks. More than most industries, private bank services have been heavily impacted by the pandemic, and the changes coming to these establishments are likely to be permanent (Ozili et al, 11). There is an overall acceptance that, irrespective of when or how the Covid-19 pandemic is efficiently contained, changes brought about by it will be permanent. Working patterns that are more flexible to implement a digital process that reduces the need for physical interactions, private banks will gradually transition to what is currently being named the “new normal.”
Private banks do not have the ability to overlook the significance of effective client engagement. Despite everything, it is in these uncertain times that individuals are enthusiastically looking for support and advice. It is ostensible that some are not contented with their private banks handling the pandemic. Private banks require to see technology as a tool that can be imaginatively leveraged to involve their customers and networks. Private banks ought to consider the several challenges that might come about and create effective solutions accordingly, be it by enhancing its monitoring mechanisms so as to track backlogs closely or by making provisions for particular scenarios on a risk-based approach and other connected impacts arising from the challenges in these times.
Works Cited
Boru, Tesfaye. “The impact of Covid 19 on the private banking system.” European Journal of Business and Management 12.16 (2020).
Ozili, Peterson K., and Thankom Arun. “Spillover of COVID-19: impact on the Global Economy.” Available at SSRN 3562570 (2020).
